Finance and Accounting

Important steps to prevent expense fraud

Data from Oversight states that in spite of the global travel restrictions during the pandemic, organisations reported a 292 per cent rise in travel and expense (T&E) violation rates! Where did people spend all that money? Claiming reimbursement for fictitious or inflated business expenses, non-business related expenses, and for expenses already reimbursed once, is not a new phenomenon. Before the pandemic, losing about USD 7 million for every USD 1 billion of revenue generated, in purchase-card (P-card) and T&E fraud, was an accepted liability. But the sharp increase during the pandemic was a surprise.

Why did this happen? The worldwide shift to remote work brought in a sense of ambiguity across industries and employees knowingly or unknowingly committed numerous expense policy violations. The focus was on business continuity and employees were given quite a wide latitude to purchase whatever was needed. This led to an extremely high volume of expense violations.

Outdated policies, first time spenders and loopholes in the expense-reporting process were all at play. CFOs and finance teams recognise this and are now giving risk assessment and spend optimisation the highest priority. There are different steps that can be taken to prevent and control expense fraud.     

How to prevent expense fraud

  1. Draft an unambiguous expense policy
  2. Work models have changed globally, so work-related policies must be reworked too. Drafting a clear, concise and unambiguous expense policy is an essential step towards mitigating expense fraud. Expense policies must keep pace with new working models. Home office supplies are a new-and-here-to-stay category. Well-defined spend limits and any other defining limits such as brand, etc., for this category should be spelt out clearly. Categories that are not part of the reimbursement scheme, and permissible amounts that can be expensed on activities such as entertainment and food must also be clearly outlined.  A well-drafted policy is usually self-explanatory and employees should be able to find all the answers in it. However, just drafting the perfect policy is not enough. Employees must also be educated on various aspects such as the different categories of acceptable reimbursements, the defining features of expense fraud and the penalties associated with such fraud. Vague T&E policies and very strict T&E policies are both causes of fraudulent claims. While the former is not clear about items that can or cannot be expensed, the latter ruffles too many feathers. There must be a happy and realistic middle path for best results.  

  3. Ensure adoption and compliance
  4. Organisations must ensure that the expense policy — new or existing — is accessible and understood by all concerned personnel. It could be sent out by email, posted on the intranet, explained in workshops, or an app could be built for it. To foster accountability and make compliance part of company culture, organisations should consider using a uniform governance policy across ranks.  

  5. Increase layers of approval and audits
  6. If expense reports are carefully checked by managers before being forwarded to finance teams, fraud can be significantly reduced. Expense reports must be checked to ensure the expenses claimed fall within permitted limits and categories. The managers who verify expense reports must also be well versed in the expense policy. Claim approvers  must also be ready to ask questions when in doubt. Checks at more than one level not only reduces fraud but it also reduces accounting errors. A possible bump here is the relationship between the manager and the claimant. Too much bonhomie may encourage both to collude and get outlandish expenses approved. To overcome such situations, organisations must ensure that the claim approver is unbiased. Auditing expense reports is another way to deter employees from fraudulent claims. Random or routine audits can also unearth any existing loopholes in an organisation’s expense policy. Audits ensure all proper documentation to support expense claims is collected. Audit findings should be shared with employees to resolve any ambiguities in understanding. This is especially important with new employees.   

  7. Issue prepaid cards
  8. Measures to control spending can include prepaid cards with defined limits, clear expense categories and sometimes even designating stores. Corporate card records have the added advantage of being accessible to finance teams. Fake receipts and exaggerated amounts cannot be submitted. Further, refunds get sent back to the card followed by notifications to the company. Such precautions are deterrents to employees who may harbour thoughts of hiding facts. 

  9. Deploy software customised for online expense management
  10. Compliance issues can be managed effectively by using expense management software. Expense policies and other parameters to validate expenses can be fitted into the software. Overspending, spending outside of the defined categories and most importantly, attempts to defraud the organisation, can be penalised as per organisation practices. Any violations or duplicate entries can be easily flagged by the software and next steps taken. Expense management software makes it easy to connect corporate cards with specific employees for easy tracking and reconciliation. Denial of unaccepted expenses becomes easier with automated software since every claim entry can be categorised into an accepted or unaccepted expense easily. It also reduces the chances of human error.

Managing fraudulent invoicing from vendors is perhaps one of the other big challenges for small businesses. Higher-than-agreed billing amounts, double invoices and false documents are among the most common risks. It takes time and effort to verify every invoice, but given the magnitude of the stakes, every business, small or large, must have processes and checks in place to detect such frauds. Implementing an efficient invoicing and ERP software or any other technological tools available can help resolve most financial frauds. Alertness and willingness is key.

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